Shortly after the SEC made public its fraud complaint against Goldman Sachs (NYSE: GS ) , CEO Lloyd Blankfein contacted Warren Buffett to ask for advice. According to The Wall Street Journal, Buffett told Blankfein he'd get back to him if he came up with any good ideas. It strains credulity that the CEO of Berkshire Hathaway (NYSE: BRK-A ) (NYSE: BRK-B ) , which stands to become Goldman's largest shareholder if it exercises its Goldman warrants, had nothing more to say. Here's why -- and what Buffett should have told Blankfein.
Buffett's been down that road
Buffett has a substantial economic interest in the matter, and he happens to be uniquely qualified to give advice. In 1991, Salomon Brothers was embroiled in of a Treasury-bond bid rigging scandal that brought the investment bank to the brink of bankruptcy. Buffett -- whose Berkshire owned a 14% stake in Salomon -- stepped in and steered the firm away from the precipice. The episode, described in Alice Schroeder's biography of Buffett, The Snowball, is a great case study in crisis management.
Always respect the person with a hand on your respirator
Buffett succeeded partly by adopting a conciliatory, even humble, tack in dealing with regulators, reasoning that the firm's fate ultimately lay in their hands. In fact, if the Treasury Department had followed through on its decision to bar Salomon Brothers from participating in Treasury security auctions, it would almost certainly have been a death blow for the bank. Buffett's demeanor contrasted sharply with the cavalier attitude Salomon's management had demonstrated during the mounting crisis.
Goldman's leadership could have learned this lesson earlier. Only in the last few days have managers been anything less than perfectly oblivious to popular and political anger in the aftermath of the credit crisis. Blankfein's "God's work" remark is either a stunningly effective quip, or an all-time classic of executive aloofness.
Laying his golden reputation on the line
At Salomon, Buffett also insisted on transparency with regard to regulators. He put his most highly prized asset – his personal reputation -- on the line to save the firm. On the Sunday on which the Treasury had scheduled a press conference to announce they would no longer do business with Salomon, Buffett made an emotional appeal to then-Treasury Secretary Nicholas Brady to reverse course. ("Nick, this is the most important day of my life," Buffett told Brady in a phone call.)
The settlement imperative
Perhaps Buffett's experience with Salomon was so traumatic that he can't bring himself to offer even a few pointers to Goldman. In that case, I'll step in for him.
"Settle as quickly as possible, and damn the cost!" That's what I would have told Blankfein, had he bothered to ask. It's very difficult to imagine a negotiated fine and related costs that would come anywhere near the reputational risk and uncertainty associated with a trial. Since the SEC announced its fraud complaint on April 15, Goldman Sachs has lost nearly a fifth of its market value -- $18.7 billion.
By contrast, a 2003 global settlement regarding conflicts between stock research and investment banking concluded with regulators imposing payments totaling $1.4 billion, spread across 10 firms. Salomon Smith Barney, now part of Citigroup (NYSE: C ) , paid out the largest individual amount, at $400 million; Goldman's total came to $110 million. Goldman earned $13.4 billion in profits last year.
Goldman is starting to get it -- at last
Signaling that it recognizes the need to change the way it does business, Goldman has begun drawing up new guidelines dictating how employees can market securities to the firm's clients. This puts pressure on competitors, including Morgan Stanley (NYSE: MS ) and JPMorgan Chase (NYSE: JPM ) , to follow suit. It's also a show of goodwill, and part of the groundwork for a settlement with regulators. As far as the SEC's civil fraud charges are concerned, I'm highly confident they'll never reach trial. Lloyd Blankfein, who rose to prominence at Goldman within its trading activities, must surely realize that going to trial would amount to putting the firm into a terrible trade.
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